Following Silicon Valley Bank’s collapse and calls to pause interest rate hikes, the Federal Reserve raised interest rates for the second time this year by 25 basis points on Wednesday.
The Federal Open Market Committee (FOMC) has announced its decision to increase interest rates by 25 basis points for the second time in the current year, as it aims to combat inflation.
Despite positive economic indicators such as a reduction in inflation in February and a thriving labor market that added 311,000 jobs, the FOMC, led by Fed Chair Jerome Powell, maintains that there is still much to be accomplished in achieving the pre-pandemic goal of attaining a 2% inflation level.
In February, Powell expressed his anticipation for a significant decline in inflation in the year 2023. He cautioned that this would be a gradual process, which may take a considerable amount of time and would not occur seamlessly. Instead, he anticipated that there would be bumps along the way.
The FOMC’s statement issued on Wednesday indicated that the committee deems it necessary to implement additional policy measures to attain a monetary policy stance that is adequately restrictive to achieve a 2% inflation level over an extended period.
Although the committee is currently slowing down interest rate hikes, it intends to continue increasing rates throughout the year.
Democratic lawmakers have been urging Powell to halt the rate hikes for several months, particularly in light of recent turbulence in the banking industry.
The past few weeks saw federal regulators close down Silicon Valley Bank and subsequently rescue the bank’s depositors, a move that received criticism from both sides of the political spectrum.
While Republican lawmakers alleged that the bailout was skewed towards the wealthy, Democrats honed in on 2018 legislation that overturned the Dodd-Frank Act, a law enacted in 2010 to safeguard consumers from predatory financial practices.
The 2018 bill, signed into law by former President Donald Trump, removed stress tests for small and medium-sized banks, including SVB. As a result, oversight mechanisms were absent, which could have otherwise ensured that these banks were equipped to respond to factors like an increase in interest rates.
However, other Democrats have not been as supportive. In a recent interview with Bloomberg, Senate Banking Chair Sherrod Brown urged the Fed to halt the rate hikes.
Massachusetts Senator Elizabeth Warren held Powell responsible for SVB’s collapse and told NBC’s Meet the Press that Powell aims to slow down the economy, leading to a loss of two million jobs, according to the Fed’s estimate. She believed that the Federal Reserve Chair should not pursue such a course of action. In Powell’s view, the situation presents a classic scenario of being damned if you do and damned if you don’t.
Warren criticized Powell, claiming that he was not fulfilling his dual responsibilities as both an oversight manager of large banks and a decision-maker on inflation. Despite this, Powell maintains that it is preferable to raise interest rates excessively rather than inadequately to combat inflation, implying that more hikes this year cannot be ruled out.
Last month, Powell expressed his opinion that it is a challenging task to balance the risks of taking insufficient action and discovering in six or twelve months that the inflation problem persists.
This would require implementing further measures, and there would be a real risk of expectations becoming unsettled. As such, he believes that it is better to be cautious and prevent inflation from spiraling out of control.
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